The ongoing AI revolution is experiencing an unprecedented boost from the powerhouse stocks commonly referred to as the “Magnificent Seven”: Microsoft, Amazon, Alphabet, Apple, Tesla, Meta Platforms, and Nvidia (NASDAQ: NVDA).
Exceptional performance characterizes most of these AI stocks over the past year, outpacing the S&P 500. Among them, Nvidia stands out as a standout performer.
Notably, Nvidia has surged by almost 260% in the last year, witnessing a staggering addition of a trillion dollars to its market capitalization in less than 12 months. While such a remarkable ascent might lead investors to think they’ve missed the opportunity, a closer examination of Nvidia’s current business state and potential catalysts for future growth suggests that now might be an opportune moment to initiate a position in this formidable AI stock.
What goes up must come down, right?
Nvidia manufactures graphics processing units (GPU) that are used across an array of generative AI applications, including accelerated computing and machine learning. Demand for the company’s flagship A100 and H100 chips is staggering, and it doesn’t seem to be slowing down.
Nvidia recently reported financial results for its fourth quarter and fiscal 2024, which ended Jan. 28. For the full year, the company generated $60.9 billion in revenue — up 126% year over year. But what’s even more encouraging is the company’s margin expansion and profitability growth.
In fiscal 2024, Nvidia’s gross margin was 72.7% — an increase of nearly 16 percentage points over the prior year. On top of that, the company’s free cash flow of $27 billion surged sixfold year over year.
With a financial performance like this, the music eventually has to stop, right? I wouldn’t bank on that just yet.
Nvidia could just be getting started
Despite Nvidia’s record growth last year, the consensus among Wall Street analysts is that the ride could just be getting started.
Nvidia is anticipated to achieve a remarkable 78% growth in its top line this year, with expectations of more modest expansion in the subsequent years. While forecasting beyond the near term can be speculative, I, as an investor, am cautious about placing excessive reliance on estimates extending beyond fiscal 2025.
My suspicion that the provided estimates might be conservative is fueled by recent revelations about intriguing catalysts. A notable development is Nvidia’s involvement as an investor in SoundHound AI, a voice-recognition software company. Although the exact terms of this partnership remain undisclosed, Nvidia joins other major tech players like Apple, Microsoft, Amazon, and Alphabet in exploring AI-powered voice assistants. This collective interest underscores the potential profitability of voice recognition within the broader AI landscape.
Furthermore, insights gained from Nvidia’s fourth-quarter earnings call reveal the emergence of a burgeoning enterprise software business. While it is in the early stages, this development signals optimism for Nvidia’s foray into software, indicating a strategic move beyond semiconductor chips.
Notably, software ventures typically yield higher profit margins compared to hardware development. As the semiconductor manufacturing landscape becomes more competitive, with potential pricing pressure, Nvidia’s pivot to software suggests a proactive stance to counter any potential margin erosion. By integrating software into its core data center operations, Nvidia appears poised to navigate market dynamics and maintain a competitive edge.
Is it too late to invest in Nvidia?
During the fourth-quarter earnings report, Nvidia’s CEO, Jensen Huang, made a bold assertion, stating that “accelerated computing and generative AI have hit the tipping point.” Contrary to interpreting this as a signal of a downturn in Nvidia’s performance, Huang clarified that he believes the installed base for data center infrastructure could potentially double in the next five years.
With Nvidia’s dominant position in this market and the previously outlined catalysts, investors have compelling reasons to anticipate substantial upside in Nvidia stock.
Hans Mosesmann of Rosenblatt Securities has recently assigned a $1,400 price target to Nvidia stock, implying a potential 60% upside from its current trading levels. Regardless of whether this target is achieved, the overarching trend remains significant.
Considering the enduring secular trends driving increased investment in artificial intelligence (AI), projections indicate a substantial and ongoing rise in spending over the coming years. Nvidia’s unique positioning across both hardware and software, coupled with the expanding array of use cases and applications, suggests that the company’s growth journey is just beginning.
For investors, the current juncture presents an interesting opportunity to consider using dollar-cost averaging to initiate or augment a position in Nvidia stock.
